In this blog post we look at the reasons for service charge disputes arising between the Landlord and tenants in commercial properties.

Can the owner charge occupiers for roof repairs?

The important case of the case of Princes House Limited v Distinctive Clubs Limited [2006] ALL ER(D) 117 highlighted the typical reasons for disputes arising between owners and occupiers in a commercial property. The case concerned an owner who wanted to recover the costs of roof repairs required for the premises. In his summing up of the case, the judge referred to the following as common causes of service charge disputes.

The owner or managing agent fail to read the lease and then do not properly consider the costs that can validly be recovered through the service charges

The owner tries to charge for everything

The owner fails to manage expectations and eventually demands substantially more money than the occupier expected

The occupier, in response to the unprofessional behaviour of the owner, becomes obstructive and unwilling to compromise and the matter has to be resolved in the courts.

The case is referred to in Section 1 of the 3rd RICS Commercial Code and forms the setting for the core principles behind the standards required of professionals operating in the sector as laid down in the Code. It is clear that the behaviour of the owner in the case falls way below what is expected of professionals operating in the sector.

Other causes of service charge disputes

Even when the intentions of the parties to the lease are not in question, or when they have professional advisors who follow best practice, there is still plenty of scope for tension and disputes to arise between the parties to the lease. Common causes include the following scenarios.

The owner needs to exercise judgement Common examples of this include the apportionment of costs and the treatment of void periods. If there is no precise formula laid down in the lease for allocating costs then it is highly likely one of the owners will be unhappy with the outcome.

When premises are vacant it can be tempting for the owner to reallocate shared expenditure between the occupiers of the building. This is clearly incorrect and unfair on the remaining occupiers and the treatment and calculation of void periods can be a common cause of disputes between owner and occupiers.

The extent of any repairs to be carried outWhen essential repairs are required to be carried out then consensus between the owner and occupier should be possible. However, the extent of the repairs will often be a bone of contention between them. Usually, in these circumstances the occupiers will want to minimise costs and to arrive at a pragmatic and often short term solution. By contrast, the owner will look for a solution that will be an improvement to the premises and thereby enhance the long term value of the property.

Reserve contributions and occupiers with short leasesThe lease will often require occupiers to make contributions to reserve funds. However, occupiers with short periods remaining on their leases will often be reluctant to make these contributions as they feel it is unlikely they will benefit from reserves that will be expended in the future after they have vacated the premises.

The Premises are mixed use with a residential elementCare is required when the premises are mixed use and contain a residential element. In a mixed use property it can be tempting for managing agents to treat all parties in exactly the same way. This is incorrect as residential owners may not be required to pay towards some services that benefit the communal areas of the property.

Occupiers are focused on running a businessBusiness owners are usually focused on the trading activities of their businesses. This is understandable but it does mean that they may be unable to pay attention to service charge matters. In these circumstances, costs can arise unexpectedly on the business and this can come as a nasty surprise to occupiers. The natural reaction in these circumstances is to resist service charge increases.

How to avoid service charge disputes?

As with most relationships, the key to avoiding disputes is to ensure that meaningful and timely communications take place between the parties. It is well worth both parties investing time in the relationship to ensure that outcomes are positive. In particular, financial information should be professionally prepared and presented. This will reduce the potential likelihood of disputes arising from service charge expenditure.

If the owner appoints an independent accountant to report on service charge accounts then this will increase the likelihood that the parties to the lease will accept the service charge statements as having a degree of accuracy. The independence of the reporting accountant can be an important factor in improving the relationship between owner and occupiers.

For the occupier, the independent accountant provides assurance that an accounting professional has reviewed the service charge statements and is willing to attach a certificate or report to the accounts.

For the owner, there are also benefits in that the accounting systems used to generate the accounts are tested and financial disciplines are scrutinized.

Conclusion

Disputes can often arise between owners and occupiers. They are usually an unnecessary distraction for everyone and therefore it is important that efforts are made to provide timely and transparent financial information. Using an independent and experienced firm of service charge accountants can improve relationships and add value to the service charge accounting process.